The growth in residential house prices has started to moderate and, despite low interest rates, buyers remain cautious and sellers may need to rein in their price expectations.

Further, the oversupply of commercial office space and residential flats is expected to remain until general economic growth drives demand higher and vaccination rates improve.

Industrial properties, meanwhile, have low vacancy rates, partially owing to them not being speculative assets. However, owing to the relatively low vacancy rates, it is one of the better performing property classes, real estate and property economics, research and consulting firm Rode and Associates CEO and founder Erwin Rode pointed out during a webinar this week.

Economic modelling done by Rode and Associates points to industrial properties entering a shallow trough in years to come as part of the about 20-year property cycle, which means these properties will not experience much decline in real terms.

Nevertheless, South Africa continues to experience deindustrialisation that started in the early 1990s and a second scenario modelled by the company indicates that this long-term trend is set to continue.

"Deindustrialisation is a terrible situation for a developing country to be in, but there is nothing that can be done, as local wages are too high relative to international producers, particularly in Asia," Rode said.

The South African economic recovery following the shock caused by Covid-19 pandemic-linked lockdowns is set to continue throughout the year and should ideally be kept going to boost business confidence and future earnings to ensure that companies go out and take risks, raise capital, expand operations and employ more people, Nedbank chief economist Nicky Weimar told webinar participants.

"These requirements are fundamental not only for sustainability and a strong recovery in the property market, but also for robust and healthy general economic environment. However, the chances of this happening are slim. The reason is that not only growth, but growth in fixed investment is necessary as the propeller of economic growth. Fixed investment enables companies to expand operations and increase employment, leading to a virtuous cycle.

"This is highly unlikely because fixed investment has been exceptionally hard hit by Covid-19, but has been on an extended downward trend before the pandemic. The rebound in fixed investment following the end of the hard Level 5 lockdown [in June 2020] was unimpressive and by the end of the second quarter of this year remained well below the levels prior to lockdown, which wiped out this type of spending back to 2006 levels," she said.

The contributing factors holding back fixed investments include almost chronically weak and subdued business confidence, also strongly affected by more than a decade of rising corruption, an implosion of public infrastructure and, ultimately, higher costs for using this infrastructure that does not contribute to economic growth.

Fixed investment activity is also affected by the implosion of capital expenditure by State-owned enterprises, which also limits the private sector's ability to expand. The most obvious example is the constrained electricity supply, which is insufficient, although there have been encouraging developments on this front such as the deregulation of embedded electricity generation up to 100 MW and the push to unbundle State-owned power utility Eskom, as well as carry out deep maintenance of the power fleet to repair some of the damage caused by years of poor maintenance, she said.

"We may slowly see a situation where more companies can sustain themselves with their own power and not be subjected to disruption of the grid, but this will take time. In the interim, there will not be sufficient electricity, which will constrain expansion of activities, and rising costs is also a hurdle for new projects and discourages fixed investment by the private sector," she said.

These types of challenges extend to transportation, roads, rail and port infrastructure, with similar shortages and infrastructure backlogs, as well as often being unreliable and expensive. The economic infrastructure is not conducive to expansionary economic activity and fixed investment, said Weimar.

However, there are favourable factors, including improved household financial health, with more households saving, which they could invest in property if confidence improves, she added.

Meanwhile, the residential property market is one of the good news stories of the economy, and has defied predictions of doom and gloom since the pandemic began, said Seeff Group chairperson Samuel Seeff.

The five interest rate cuts by the South African Reserve Bank in 2020 that lowered the prime lending rate from 10% to 7% allowed more people to buy houses and banks have also been aggressive in competing to offer home loans to clients and there is an increased propensity by banks to lend money for home buyers and first-time buyers, he said.

"Banks are offering higher loan-to-value ratios and the new trend has seen a Covid-induced shift of buyers moving back to suburbs, as well as the growth of Zoom towns."

Additionally, there have also been high approval rates for home loans of 82%. Fifty-four per cent of home loan applications in 2020 came from first-time buyers, which has moderated to 48% in the second quarter of 2021, and there has been an increase in banks providing 100% loans for first-time buyers, Seeff said.

Further, in contrast to many other economies, South Africa's house price growth has remained relatively modest at 7.5% compared to certain US house prices growing by 16.5% year-on-year, although this has come down to 12.5%, and Sydney house prices grew 25% since the start of the pandemic, he illustrated.

Retail properties, meanwhile, remain under pressure with vacancy rates in malls up to 6.8%, well above the long-term average of 3.3%, said Rode.

"The reason is that the consumer remains under pressure. Convenience centres, however, are doing much better than larger malls, but another wave of Covid-19 infections and associated restrictions may place further pressure on retail property."

A positive sign in the retail property market is that there has been a deceleration in new supply of retail property, which should support existing retail properties when demand picks up.

"We expect low growth and high uncertainty to persist over the next few years, and much depends on how government reacts to manage the economic pressures and structural challenges. Government departments are overstaffed and public sector wages are on average 30% higher than private sector wages, while many consumers, especially lower-earning consumers, are experiencing a catastrophe in terms of employment, earnings and wages," he said.

Office properties are fundamentally cheap, but can get cheaper as vacancies persist. Industrial properties remain the best of the property asset classes. Retail property is in a situation of oversupply and residential property is expected to enter a downcycle and, if taxes are raised, this would further suppress growth, said Rode.